Debt Forgiveness: Dangerous Trend or Absolute Necessity?

Vinod K. Aggarwal

World Link, 1991

As the debt crisis drags on into a second decade, debate rages over whether the banks should forgive part of the debt owed to them by debtor countries. Arguments are generally couched in terms of North versus South, or law-abiding bankers versus corrupt borrowing countries. But this characterization misrepresents the problem. The struggle is actually between extremely short-term minded banks versus almost all other interests. This latter group includes exporters, industrialists, consumers, creditor governments, taxpayers, and banks with longer-term perspectives in the developed world, and businesses, workers, and consumers in the developing world. Ironically, then, a small group of bankers has managed to define the agenda for everyone else to their own benefit and to the detriment of a wide host of other interests.

Who does this hurt? The most commonly discussed groups are those in the debtor countries. Estimates suggest a net outflow from the Third World of $50 billion in 1989-1990. GNP has been declining in most debtor countries (Mexico’s fell by 16% from 1982 to 1989), unemployment has skyrocketed, and consumers struggle with worsening poverty (Mexican real wages in 1990 are half of those of 1982). But in addition to these losers from the crisis, those in the developed economies suffer as well.

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